Oil subsidies: Surprise! Liberals are fans, too.

When asked if the federal government should eliminate subsidies for oil companies, most would respond with a resounding 'yes.' But such a policy would have unwelcome unintended consequences, and not just for billionaire oil tycoons.

The arctic oil drilling rig 'Kulluk,' sits at the Vigor Shipyards as it undergoes extensive work in Seattle in this May 2012 file photo. On its surface, getting rid of oil subsidies seems like an indisputably great idea. But Rapier shows that the truth may not be so simple.

Survey Says…

If you were to survey people and ask the question “Should we subsidize oil companies?” — the overwhelming majority would undoubtedly respond “No!” The notion that we are subsidizing oil companies generates outrage in many people, but in this article I will show why these subsidies aren’t going to go away any time soon. The reason may surprise you.

I decided to write this article following a a recent discussion in a CleanTech discussion group on the social networking site LinkedIn. The person who started the discussion asked the question “Why is it so Hard to Kill Fossil-Fuel Subsidies?” The discussion was prompted by a recent article by environmental activist and author Bill McKibben called "Payola for the Most Profitable Corporations in History." In the article McKibben proposes “five rules of the road that should be applied to the fossil-fuel industry.” But McKibben himself demonstrated in his article that he doesn’t really understand the nature of these subsidies — and this sort of misunderstanding largely explains why so many people are outraged that they persist.

So let’s take the original question on subsidies and ask it in a different way: “Should we allow oil companies to take a tax deduction also available to any U.S. manufacturer such as Apple or Microsoft?” A lot of people will still answer “No” to that question, but certainly fewer than answered “No” to the original question.

Now ask the question “Should farmers be allowed a fuel tax exemption for the fuel they use on the farm?” In this case, some people are going to say “No”, but farmers are going to be near unanimous in saying “Yes!”

Let’s ask one final question: “Should low-income families who struggle to pay their heating bills be helped with programs like the Low Income Home Energy Assistance Program (LIHEAP)?” The irony in this question is that some of the people who are the most vehemently opposed to fossil fuel subsidies will argue that this is an important program that helps keep poor people from freezing to death in winter, and thus it would be inhumane to eliminate it.

Yet unless you answered “No” to all four questions you support programs that have been identified as fossil fuel subsidies. Bill McKibben himself indicates sympathy for subsidies when he wrote: “Many of those subsidies, however, take the form of cheap, subsidized gas in petro-states, often with impoverished populations — as in Nigeria, where popular protests forced the government to back down on a decision to cut such subsidies earlier this year.” However, he then incorrectly asserts “In the U.S., though, they’re simply straightforward presents to rich companies, gifts from the 99% to the 1%.”

That’s just not true, and a failure to understand this is why there is so much outrage over fossil fuel subsidies in the U.S. (As an aside, characterizing the oil companies as “the 1%” is also misleading, because oil companies are overwhelmingly owned by the 99%). During the course of the LinkedIn discussion, a link was provided to Oil Change International, an organization devoted to pushing a transition away from fossil fuels. On their site they have a page on fossil fuel subsidies, which includes a link to a spreadsheet from the OECD breaking down various fossil fuel subsidies. The summary of oil-related subsidies for 2010 totals $4.5 billion. That is a number often thrown out there; $4 billion a year or so in support for those greedy oil companies.

But look at the breakdown. The single largest expenditure is just over $1 billion for the Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages. The second largest category is just under $1 billion in tax exemptions for farm fuel. The justification for that tax exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the tax exemption is technically not supposed to be using the roads. The third largest category? $570 million for the Low-Income Home Energy Assistance Program. (This program is classified as a petroleum subsidy because it artificially reduces the price of oil). Those three programs account for $2.5 billion a year in “oil subsidies.” So the next time you hear someone express outrage over oil company subsidies, you may want to ask them exactly which ones they are talking about.

Oil Subsidies that Liberals Love

So why do we still have fossil fuel subsidies? Because almost nobody — not even Bill McKibben — wants to get rid of all of the programs that are classified as fossil fuel subsidies. I suspect McKibben would not advocate eliminating the Low Income Home Energy Assistance Program. Two of the most outspoken Democratic opponents of oil subsidies have strongly defended this particular program — even though it has been identified by the OECD as the 3rd largest petroleum subsidy. When Republicans tried to cut funding for the program, Sen. Chuck Schumer, D-N.Y., called the proposal an “extreme idea” that would “set the country backwards.” Rep. Edward Markey, D-Mass, states on his website that he is a “longtime Congressional champion of providing assistance to low-income families to heat and cool their homes.”

In fact, look at the reaction from Democrats when President Obama tried to reduce funding for the program. Rep. Markey’s office said: “If these cuts are real, it would be a very disappointing development for millions of families still struggling through a harsh winter.” Sen. Jeanne Shaheen, D-N.H., noted her opposition: “The President’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact on many of New Hampshire’s most vulnerable citizens and I strongly oppose it.” Sen. John Kerry, D-Mass., wrote a letter to President Obama that stated in part: “We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season.” Each one of these Democrats was defending a program that has been identified as a subsidy to Big Oil.

What is the Impact of Eliminating the Subsidy?

Of course there are other tax deductions that do more directly benefit the oil industry, just like every taxpayer has tax deductions that benefit them. Many of us take advantage of a mortgage interest deduction when we pay our taxes, but I bet most people would resent being told they are collecting subsidies just because they sliced a small portion off of their tax bill with that deduction.

Last year CNN did a story where they put together their own list of the so-called oil subsidies, and they wrote that the “largest single tax break” — amounting to $1.7 billion per year for the oil industry — is a manufacturer’s tax deduction that is defined in Section 199 of the IRS code. This is a tax credit designed to keep manufacturing in the U.S., but it isn’t limited to oil companies. It is a tax credit enjoyed by highly profitable companies like Microsoft and Apple, and even foreign companies that operate factories in the U.S. Further, the deduction for oil companies is already limited. Apple is able to take a 9% manufacturer’s tax deduction, but ExxonMobil is only allowed to take a 6% deduction.

We can certainly debate whether the manufacturer’s tax credit is a subsidy that should be eliminated. But it is important to be informed as we discuss the issue. We need to ask three questions: 1). What is the purpose of this “subsidy?”; 2). Is the tax credit working as intended?; and 3). What is the projected impact from eliminating it?

The intended purpose of course is to keep manufacturing in the U.S. It is really irrelevant how profitable Apple might be; if there is a compelling financial advantage for them to build a factory overseas they will do so. This tax credit provides incentive for them to keep manufacturing in the U.S.

Likewise, ExxonMobil has access to oil fields and refineries in many foreign countries. If they are comparing projects here and abroad, that tax credit will factor into their decision. Whether it is enough to push them one way or another is something I don’t know. There should be some independent analyses to examine the impact. Many opponents of subsidies imagine that the impact will merely be taxpayer savings as ExxonMobil loses out on this tax credit. But what if the impact is that we lose domestic jobs as ExxonMobil shifts operations out of the U.S. (something that tax credit was designed to prevent)? What if the impact is that we continue to use just as much oil, but more of it now comes from overseas because we placed our domestic producers at a competitive disadvantage? Have those who are calling for an end to this tax credit actually studied the issue?

The Three Pinocchios

We explained in a previous column that reasonable minds disagree about whether it is appropriate to use the term “subsidies” to describe what are really just oil industry tax breaks. That’s because the average person understands the term “subsidy” to mean actual cash investments, the likes of which the Obama administration has given to alternative energy companies like the now-bankrupt solar-panel manufacturer Solyndra.

Technically speaking, the government has allowed only tax deductions to help oil companies recover the cost of doing business — this is standard in virtually all industries. No money from the U.S. Treasury goes to the oil industry, so it’s a stretch to describe the tax breaks as literal handouts like Solyndra received. Admittedly, we’re talking about a semantics issue here. But we can’t understand why the DNC and Obama continue to use the word “subsidies” in such a questionable way, especially when the term “tax breaks” is more accurate and indisputably true.

The subsidy claim being pushed by President Obama and others (like Bill McKibben) received a Washington Post rating of Three Pinocchios, which represents “Significant factual error and/or obvious contradictions.”

Conclusions

If we are to have a productive discussion of fossil fuel subsidies, it is important that participants understand what they are, their intended purpose, and what the impact of removing them is projected to be (and projected means conducting an actual analysis). Because of misleading political rhetoric, people imagine these subsidies as cash payments to oil companies. But, these subsidies are not what people think they are, and in many cases they are benefiting people who have nothing to do with the oil industry.

That is why it is so hard to get rid of them; a majority of the population likely supports at least some of them. And until those who are loudly screaming that we must eliminate these subsidies actually take the time to understand what they are — as well as the impact of removing them — we can expect there will continue to be much heat and little light on this topic.

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